SOUTHEAST SNAPSHOT, AUGUST 2007

Raleigh, North Carolina Office Market

The Research Triangle Park (RTP) between Raleigh and Durham, North Carolina, is flourishing as the most vibrant submarket in the region, in itself pushing up the growth and development of the region’s office market, but positive growth and development is occurring throughout the area. With a phenomenal amount of job growth occurring — 38,000 jobs in 2006, with 30,000 expected in 2007 — office absorption is occurring due to solid leasing activity; also resulting from this momentum, speculative development is cropping up across the market.

“Activity is robust, and there has been a significant amount of product announced in multiple submarkets,” says W. Michael Lewis, president of Raleigh-based The Lewis Group/CORFAC International. “The trend in most markets has been pre-leasing, but we’re seeing large speculative spaces for the first time in years.”

Fidelity Investments is leading the job growth, bringing a regional operation to the market and adding up to 3,000 jobs over the next several years. The company had signed approximately 500,000 square feet of leases in multiple deals in the RTP and along the Interstate 40 corridor by the end of 2006. Furthermore, Quintiles, a clinical testing company, newly occupying a 200,000-square-foot tower, plans to add 1,000 jobs to the mix.

“Because of the talent we have in this region, we have a trend of companies looking for major regional headquarters in our market, if not looking to relocate completely,” says Brad Corsmeier, vice president at Colliers Pinkard in Raleigh. “We continue to attract technology and biotech companies, and the financial markets are looking at Raleigh-Durham for back offices and IT space, pulling some of their operations out of the major markets to put them here as we continue to grow.”

According to CB Richard Ellis’ First Quarter 2007 market report, vacancy for all office properties in Raleigh-Durham stands at 13.1 percent, with Class A space checking in at just less than 12 percent. Year-to-date absorption stood at 367,051 square feet, and rental rates across the board average out to $19.21 per square foot, but rates for new Class A properties are much higher.

Ed Pulliam, senior vice president at CBRE in Raleigh, explains, “Class A properties are doing quite well, and while activity in Class B and C properties are lagging behind that, as rents continue to escalate on Class A product the rest will see increased momentum.”

Other than new construction in the office market, a trend shifting toward single-story flex space has occurred due to rising cost of land and rising rental rates, which are approaching $26 to $27 per square foot for new product even in the suburban markets, according to Corsmeier. The price for single-story product is remaining in the $20 per square foot range, he says, leading to a tightening of that sector.

Development is occurring throughout the city — especially at the RTP, the market’s economic driver, but also at Brier Creek, due to its prominent location at U.S. 70 and Interstate 540; Perimeter Park and Imperial Center, situated near I-40 and I-540; North Hills, due to the mixed-use/live-work-play environment; and the downtown areas are seeing revitalization as well.

“Development is occurring throughout many of the Triangle’s submarkets, which is not surprising, given that Raleigh-Durham continues to rank high on the lists of best places to live and conduct business in the country,” says Lewis. “Downtown Raleigh remains a desirable location, as evidenced by RBC Centura’s new headquarters, a 293,000-square-foot mix of offices and condominiums, and Durham’s downtown has turned a corner as well, becoming a major redevelopment hub as developers are bidding for older buildings as they become available.”

Highwoods Properties, responsible for the RBC headquarters project as well as Glen Lake in West Raleigh, is one of the largest REITs in the Southeast, and other active developers include American Asset Corporation, Hamilton Merritt and Keystone.

Among the new developments currently online in the Triangle region, several are underway at Brier Creek Commons, as American Asset Corporation recently completed buildings IV and V, totaling more than 250,000 square feet. Speculative office development is underway at Imperial Center, with Principal Financial Group completing a 120,000-square-foot facility by November of this year; Duke Realty also is constructing a 204,851-square-foot spec project at Perimeter Park. Furthermore, Lauth is developing a 59,743-square-foot medical office project.

Aside from Fidelity and Quintiles adding space via large lease transactions, Lenovo has leased 183,000 square feet at Perimeter Park for its U.S. headquarters, and the American Kennel Club signed on for 70,000 to 80,000 square feet at Brier Creek. Pulliam notes that a number of large transactions are expected to land in the next 4 to 6 months, and Corsmeier explains that a number of 20,000-square-foot to 50,000-square-foot deals have occurred, supporting the solid absorption rate.

— Dan Marcec


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